Food inflation has been an issue of huge concern over the last few years. In a recent report titled What a waste! Crisil Research points out that "food inflation has averaged 8.1 per cent in the last decade, and over 10 per cent in recent times." This when agricultural growth has been robust and our granaries continue to overflow. Agricultural growth over the last decade stood at 3.6 per cent per year, in comparison to 2.9 per cent per year in the decade before that.
The Food Corporation of India (FCI) puts out a number indicating its food grain stock every month. As on June 1, 2014, the food grain stock, which includes rice, wheat, unmilled paddy and coarse grains, stood at 74.8 million tonnes. At the beginning of June 2008, the stock stood at 36.4 million tonnes.
This indicates that the government through the FCI has bought and hoarded more and more of rice and wheat produced in the country. In a May 2013 research report — Buffer Stocking Policy in Wake of NFSB (National Food Security Bill), written by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices (CACP) — it was estimated that anywhere between 41-47 million tonnes would be a comfortable level of buffer stocks.
This would be enough to take care of the subsidised grain that needs to be distributed to implement the food security scheme. At the same time it would also take care of the strategic reserves that the government needs to maintain to be ready for a drought or any other exigency.
The current level of food grains with the FCI is significantly more than 41-47 million tonnes. One impact of this is that the government spends money in buying the "extra grain" which it does not require. This adds to the government’s expenditure and in turn the fiscal deficit. (The fiscal deficit is the difference between what a government earns and what it spends.)
The CACP authors had estimated that an excess stock of 30-40 million tonnes would cost the government anywhere between Rs 70,000 to Rs 92,000 crore.
The main reason for this "extra procurement" is the fact that the Congress-led UPA government kept increasing minimum support price (MSP) of food grains over the years, at a fast pace. In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11 per cent per year.
The FCI, directly and through state government affiliates, procures rice and wheat from farmers at the MSP set by the government. It buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality. Farmers have a ready buyer, and one who keeps increasing the price.
In 2005-2006, the MSP for common paddy (rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1,310 per quintal, an increase of around 11 per cent per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice increased at the rate of 3.8 per cent per year. In case of wheat the MSP has gone up by 14 per cent per year between 2005-2006 and 2013-2014. In comparison, between 1999-2000 and 2005-2006, the price of wheat had gone up by four per cent per year.
Resultantly, it was observed that the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012."
The FCI does not have enough storage capacity for this grain. This is one reason why newspapers frequently carry pictures of food grains rotting, lying in the open. "Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI’s own admission in the Parliament," the Crisil report points out. Rice formed 84 per cent of the total damage.
Further, the excess procurement has also led to high inflation. The CAG report points out that in 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6 per cent to 48.3 million tonnes.
The same is true of wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes. Given this, one way of bringing down food inflation is the government releasing stocks of rice and wheat into the open market. The government needs to stop procuring more than what it needs to run its various programmes. And once the government cuts down procurement, it will be beneficial on the fiscal deficit front as well as help moderate inflation.
This becomes even more important given that the India Meteorological Department expects the monsoon to be below normal at 93 per cent of the long period average.
Also, when it comes to production of food products like milk, milk products, egg, fish and meat, demand has been lagging supply. The production has risen only at a rate of 3-4 per cent between 2009-2010 and 2012-2013, whereas price has risen at the rate of 14-15 per cent. This needs to be addressed.
These steps need to be taken if food inflation has to be controlled in the time to come.
Vivek Kaul is the author of the Easy Money trilogy.
He can be reached at email@example.com